A former Berkshire Hathaway Inc. executive once considered a likely successor to Warren Buffett intentionally misled the investing guru about the stock he owned in a business that Berkshire later agreed to acquire, the company said.
A report by the audit committee of Berkshire's board faults David Sokol for giving "misleadingly incomplete disclosures" about the timing and magnitude of his purchases of shares of Lubrizol Corp., which Berkshire agreed early this year to buy in a $9-billion deal.
Sokol violated the company's ethics and insider-trading policies, according to the report released Wednesday.
"By engaging in such questionable conduct, Mr. Sokol threatened Berkshire Hathaway's reputation," the audit panel said.
The report is certain to stir intense interest at Berkshire's annual meeting Saturday. Buffett has not commented publicly since disclosing Sokol's actions regarding Lubrizol in a shareholder letter late last month. The letter also announced Sokol's departure from Berkshire.
The company is considering suing Sokol and is cooperating with government inquiries, the report said.
Sokol's lawyer said in a statement that his client is "a man of uncommon rectitude and probity" who did nothing wrong.
Sokol had been mulling an investment in Lubrizol since the middle of last year, twice informed Buffett that he owned the stock and "had no reason to anticipate that Mr. Buffett would have any interest whatsoever" when he bought the shares, according to his lawyer.
Berkshire disclosed last month that Sokol bought $10 million in Lubrizol shares days before recommending the company to Buffett. He pocketed a $3-million profit when Lubrizol's stock rose after the deal was unveiled.
Buffett seemed initially to go out of his way to defend Sokol. Buffett said Sokol briefly mentioned the Lubrizol holding and took the position that Sokol's trading didn't violate federal insider-trading laws.
The latest report takes a decidedly sharper tone.
Sokol told Buffett he was familiar with Lubrizol because he owned the stock, according to the report. But he didn't disclose that he learned of the company and bought shares only after investment bankers at Citigroup Inc. recommended the company as a potential takeover target for Berkshire. He also didn't reveal that his trading occurred after Citigroup had approached Lubrizol about a potential deal.
"It did not cross Mr. Buffett's mind at that time that Mr. Sokol might have bought Lubrizol shares after seeking through investment bankers to initiate discussions with Lubrizol concerning a possible Berkshire Hathaway acquisition of Lubrizol," the report said. "Because Mr. Sokol's comment about owning the shares was in response to Mr. Buffett's question how Mr. Sokol had come to know the company, it implied that Mr. Sokol had been following Lubrizol as an owner of its shares, and in that way came to think of Lubrizol as a possible Berkshire Hathaway acquisition."
When Sokol resigned from Berkshire last month he said his decision was unrelated to Lubrizol.